Q1 growth at 7.8% as Indian economy braves headwinds

To be sure, almost all projections, including RBI’s, expect the annual growth number for 2023-24 to be lower than the June quarter numbers

Strong domestic demand driven by government capex and a continuing recovery in contact intensive services helped the Indian economy build on its growth momentum despite external headwinds in the first quarter of the current fiscal year.

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India’s GDP growth in the quarter ending June was 7.8%, the National Statistical Office (NSO) said in a release on August 31. The latest numbers are exactly in line with a projection by Bloomberg poll of economists and 1.7 percentage points more than the 6.1% number in the previous quarter. To be sure, the latest growth numbers are marginally below the 8% projection by the Monetary Policy Committee (MPC) of the RBI.

Indian economy’s “growth prospects appear bright” despite downward risks from external factors such as “firming of prices of crude oil” and “prolonged geopolitical uncertainty”, chief economic adviser (CEA) V Anantha Nageswaran said while commenting on the GDP numbers. Analysts concurred with CEA’s assessment, identifying a service sector driven boost to domestic economy activity as an effective antidote to the headwinds from external markets.

To be sure, almost all projections, including RBI’s, expect the annual growth number for 2023-24 to be lower than the June quarter numbers. This is more a reflection of the fact that the June quarter numbers enjoy a favourable base effect. RBI’s MPC resolution released in August projected a growth rate of 6.5% for 2023-24 with quarterly growth numbers being 8%, 6.5%, 6% and 5.7% in the quarters ending June 2023, September 2023, December 2023 and March 2024 respectively.

An expenditure-side analysis of the GDP numbers shows that private consumption and investment (as captured by Gross Fixed Capital Formation) numbers have played an important role in driving the growth momentum. While Private Final Consumption Expenditure increased by 6% on an annual basis, investment spending increased by 8%. This provided a crucial buffer to the headline GDP number despite a three-fold decline in net exports of goods and services driven by a fall in exports and rise in imports.

A look at the sector-wise Gross Value Added (GVA) numbers shows that services played an important role in building the growth momentum during this period. Services as a whole have grown by 10.3% on a year-on-year basis contributing almost three-fourth to the overall growth in GVA.

A slowdown in the global economy and trade may moderate export growth, but services sector would remain a key driver, CEA said identifying the sector as a key driver of economic momentum.

“Headline growth was driven higher by continued momentum in the tertiary sector, even as the primary and secondary sectors were generally weaker compared to the previous quarter,” Rahul Bajoria, head of EM Asia (ex-China) Economics Research, Barclays, said in a note. “For FY 23-24, we maintain our forecast of 6.3%, but see modest upside risks to our forecast. Domestic demand is likely to anchor GDP growth, but some moderation may come from weaker manufacturing and exports in a global slowdown,” the note added.

Another important aspect of the latest GDP numbers is the near congruence in real and nominal growth numbers with the latter being just 20 basis points – one basis point is one hundredth of a percentage point – more than the latter. This is likely a result of fall in commodity prices – the wholesale price index contracted by 2.6% in the June quarter – which has given both a real and statistical boost to constant price numbers. In fact, in some sub-sectors including manufacturing, nominal growth numbers are lower than the real growth number. While declining commodity prices have played a role in bringing down core inflation, a moderation in nominal growth can have an adverse impact on revenue collections for the government.

To be sure, the economic policy landscape at the current juncture might be very different from what the June numbers suggest because of the performance of the monsoon season.

With August 2023 being the driest since 1901, even a normal rainfall in September – which is what the IMD has projected on August 31 – could leave to a significant rainfall deficit in the monsoon season this year notwithstanding the fact that it might not meet the technical threshold for being a deficient monsoon year. This is likely to give a further boost to inflation for key food items such as cereals which are already at uncomfortable levels. Cereal inflation came in at 13% in July 2023, making it the 12th consecutive month of double-digit inflation in the subcategory.

While the impact of deficient rains in August needs to be watched, food inflation is likely to subside with the arrival of fresh stock in the market and the government’s pre-emptive measures, CEA said. Although inflation rose in June and July 2023, India’s dynamics are still better compared to other economies as core inflation is declining and the food inflation is transitory, he added.

“While the government has taken multiple steps to control food and overall inflation, including the reduction in prices of LPG cylinders earlier this week, experts believe that these might effect collateral damage in terms of worsening of terms of trade for farmers. With production already likely to take a hit due to deficient rainfall in large parts and floods in key states such as Punjab, aggressive price control measures will entail a double whammy for farmers, which is bound to hurt rural demand,” said Himanshu, an associate professor of economics at Jawaharlal Nehru University.

“The fall in commodity prices has led to buoyant economic activity over the last few quarters. This has been visible in higher corporate margins and improved purchasing power. Going forward, the intensification of the El Nino weather phenomenon is the biggest risk to the rural economy and overall GDP growth. Already, we find that rural indicators such as real rural wages and non-durables consumption, are weakening. As the base normalises, and rural demand comes under pressure led by the El Nino, we expect GDP growth prints to slow from here on, averaging 5.8% in FY24,” said Pranjul Bhandari, Chief India and Indonesia Economist.

Given the precarious situation around food prices, the government’s political fortunes – there is less than a year to go for the 2024 general elections and the penultimate state election cycle is scheduled for end of this year – are more likely to depend on its management of this inflation-rural income contradiction rather than headline growth numbers.